Key Concepts and Summary

Key Concepts and Summary

Privately owned firms are motivated to earn profits. Profit is the difference between revenues and costs. While accounting profit considers only explicit costs, economic profit considers both explicit and implicit costs.

Glossary

accounting profit

total revenues minus explicit costs, including depreciation

economic profit

total revenues minus total costs (explicit plus implicit costs)

explicit costs

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

firm

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

implicit costs

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

private enterprise

the ownership of businesses by private individuals

production

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

revenue

income from selling a firm’s product; defined as price times quantity sold